-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OuQTrkoJNcqMHjfZZj5FINKFtJxo7Hmwd4TtNN7hxlSlzq0XH8Us4u1DFajsgYws zcvQhJzvr34+fYCxZAVUnw== 0000950144-98-009815.txt : 19980817 0000950144-98-009815.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950144-98-009815 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S TECHNOLOGIES INC CENTRAL INDEX KEY: 0000810130 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 731284747 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15960 FILM NUMBER: 98687955 BUSINESS ADDRESS: STREET 1: 3901 ROSWELL ROAD SUITE 300 CITY: MARIETTA STATE: GA ZIP: 30062 BUSINESS PHONE: 7705654311 MAIL ADDRESS: STREET 1: 3901 ROSWELL ROAD STREET 2: SUITE 300 CITY: MARIETTA STATE: GA ZIP: 30062 FORMER COMPANY: FORMER CONFORMED NAME: CAREAMERICA INC DATE OF NAME CHANGE: 19890720 10-Q 1 US TECHNOLOGIES INC 1 Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 -------------- [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-15960 U.S. Technologies Inc. (Exact name of Registrant as specified in its charter.) State of Delaware 73-1284747 (State of Incorporation) (I. R. S. Employer Identification No.) 3901 Roswell Road, Suite 300 Marietta, Georgia 30062 (Address of principal executive offices.) Registrant's telephone number, including area code: (770) 565-4311 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [..] The number of shares outstanding of the Registrant's common stock, par value $0.02, at July 31, 1998, was 29,195,278 shares. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: 2 3 U.S. TECHNOLOGIES INC. CONSOLIDATED BALANCE SHEETS
June 30, 1998 December 31, (Unaudited) 1997 ------------- ------------- ASSETS Current assets: Cash in bank $ 16,506 489 Trade Accounts receivable, net of reserves of $ 0 and $18,000 471,365 341,327 Inventories 244,342 74,933 Prepaid expenses 122,699 4,244 ------------- ------------- Total current assets 854,912 420,993 ------------- ------------- Property and equipment, net 178,957 137,024 ------------- ------------- Other assets: Note receivable, related party 302,015 296,305 Other assets 41,771 15,420 ------------- ------------- Total other assets 343,786 311,725 ------------- ------------- Total assets $ 1,377,655 $ 869,742 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) Current liabilities: Accounts payable, trade $ 821,492 $ 567,841 Accrued expenses 642,790 666,991 Current portion of long term debt 19,638 35,753 ------------- ------------- Total current liabilities 1,483,920 1,270,585 ------------- ------------- Long term debt 16,296 19,068 ------------- ------------- Total liabilities 1,500,216 1,289,653 ------------- ------------- Stockholders' equity (capital deficit): Preferred stock; $.02 par value; 10,000,000 shares authorized; no shares issued - - Common stock; $.02 par value; 40,000,000 shares authorized; 29,195,278 and 28,632,063 shares issued and outstanding 583,906 572,642 Additional paid-in capital 12,605,029 12,392,016 Accumulated deficit (13,097,904) (13,170,977) Stock receivable (213,592) (213,592) ------------- ------------- Total stockholders' equity (capital deficit) (122,561) (419,911) ------------- ------------- Total liabilities and stockholders' equity $ 1,377,655 $ 869,742 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 3 4 U.S. Technologies Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months Ended June 30, Six months ended June 30, --------------------------- --------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net Sales $ 1,154,147 $ 1,062,013 $ 2,664,711 $ 1,733,800 ------------ ------------ ------------ ----------- Operating costs and expenses: Cost of sales 793,516 1,109,053 1,791,106 1,670,946 Selling expense 29,271 21,064 66,402 21,064 General and administrative expense 463,909 311,823 850,661 517,448 Impairment of long lived assets 1,408,839 1,408,839 Restructuring charge 48,844 196,903 Other - litigation 252,256 252,256 ------------ ------------ ------------- ------------ Total operating costs and expenses 1,286,696 3,151,879 2,708,169 4,067,456 ------------ ------------ ------------- ------------ Income (loss) from operations (132,549) (2,089,866) (43,458) (2,333,656) Other income (expense) Other income 93,785 76,431 118,829 80,932 Interest expense (38) (8,178) (2,262) (11,948) ------------ ------------ ------------- ------------ Total other income (expense) 93,747 68,253 116,567 68,984 ------------ ------------ ------------- ------------ Net earnings (loss) $ (38,802) $ (2,021,613) $ 73,109 $ (2,264,672) ============ ============ ============= ============ Net earnings (loss) per share: Basic $ (0.00) $ (0.08) $ 0.00 $ (0.10) ============ ============ ============= ============ Diluted $ (0.00) $ (0.08) $ 0.00 $ (0.10) ============ ============ ============= ============ Shares used in per share calculation: Basic 29,195,278 25,438,004 29,012,810 23,609,479 ============ ============ ============= ============ Diluted 29,195,278 25,438,004 29,164,596 23,609,479 ============ ============ ============= ============
The accompanying notes are an integral part of the consolidated financial statements. 4 5 U.S. Technologies Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months Ended June 30, --------------------------- 1998 1997 ---- ---- Cash flows from operating activities: Net earnings (loss) $ 73,109 $(2,264,672) Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 27,089 141,944 Impairment of long lived assets 1,408,839 Loss on write-down of inventory 306,888 Changes in certain assets and liabilities: Accounts receivable (130,038) (68,477) Inventories (169,409) 41,754 Prepaid expense (118,455) (17,938) Accounts payable 253,651 (163,935) Accrued expenses (24,201) 173,739 ---------- ----------- Net cash used in operating activities (88,254) (441,858) ---------- ----------- Cash flows from investing activities: Equipment purchases (69,058) (21,671) Increase in other assets (32,061) - ---------- ----------- Net cash used in investing activities (101,119) (21,671) ---------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock 224,277 553,111 Payments of notes payable (18,887) - ---------- ----------- Net cash provided by financing activities 205,390 553,111 ---------- ----------- Increase in cash 16,017 89,582 Cash, beginning of period 489 1,548 ---------- ----------- Cash, end of period $ 16,506 $ 91,130 ========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 5 6 U.S. Technologies Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1997 Form 10-K as filed with the Securities and Exchange Commission. The results of operations for the periods presented are not necessarily indicative of the operating results for the full year. 2. EARNINGS PER SHARE The Company has adopted the provisions of SFAS No. 128, "Earnings per Share", which is effective for fiscal years ending after December 15, 1997. Basic earnings per common share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effect of common stock equivalents. For the three months ended June 30, 1998 and the three and six months ended June 30, 1997, diluted earnings per share have not been presented because stock options and warrants which comprised common stock equivalents would have been anti-dilutive. The following tables represent required disclosure of the reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share computations:
Earnings Per (loss) Shares share (Numerator) (Denominator) amount ----------- ------------- ------ Six months ended June 30, 1998: Net earnings $ 73,109 29,012,810 $ 0.00 Effect of dilutive potential common shares: Stock options - 151,786 Warrants - - ---------- ------------- Diluted earnings per share: Net earnings available to common shareholders plus assumed conversions $ 73,109 29,164,596 $ 0.00 ========== ============= ======
6 7 2. EARNINGS PER SHARE (CONTINUED) Six months ended June 30, 1997: Net loss $ (2,264,672) 23,609,479 $ (0.10) Effect of dilutive potential common shares: Stock options - - ------------ ---------- Diluted loss per share: Net loss available to common shareholders plus assumed conversions $ (2,264,672) 23,609,479 $ (0.10) ============ ========== =========
3. ACCOUNTS RECEIVABLE Accounts receivable - trade at June 30, 1998, and December 31, 1997, is net of an allowance for doubtful accounts in the amount of $0 and $18,000, respectively. 4. INVENTORIES At June 30, 1998, and December 31, 1997, inventories consisted of the following:
1998 1997 ---- ---- Raw materials $ 176,075 $ 59,848 Work in progress 54,462 15,085 Finished Goods 13,805 ---------- ----------- $ 244,342 $ 74,933 =========== ==========
Consistent with the Company's plans to dispose of its obsolete raw materials inventory, the value of the obsolete raw materials has been written off against the related valuation allowance. 5. PROPERTY AND EQUIPMENT At June 30, 1998, and December 31, 1997, property and equipment consisted of the following:
1998 1997 ---- ---- Equipment $ 1,045,987 $ 983,099 Furniture and fixtures 176,957 170,823 Leasehold improvements 123,520 123,520 ----------- ----------- 1,346,464 1,277,442 Less accumulated depreciation (1,167,507) (1,140,418) ----------- ----------- $ 178,957 $ 137,024 =========== ===========
7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the consolidated financial statements of the Company (including the notes thereto) included in the Company's form 10-K for the year ended December 31, 1997. General In January 1997, the Company was acquired by a group of individuals led by the Company's Chairman and CEO, Mr. Kenneth H. Smith. As a part of the acquisition, the former management and Board of Directors resigned. During 1997 the new management team was assembled, the Company's mission statement was revised, and the Company's operations were restructured. U.S. Technologies Inc. (the "Company") is an "outsourcing company" soliciting manufacturing, assembly, repair, kitting and customer call center services from Fortune 1000 businesses. The Company performs its services utilizing prison labor under the Prison Industry Enhancement Program ("PIE"). Congress created the PIE program in 1979 to encourage states and local units of government to establish employment opportunities for prisoners that approximate private sector work opportunities. The program is designed to place inmates in a realistic working environment, pay them the local prevailing wage for similar work, and enable them to acquire marketable skills to increase their potential for successful rehabilitation and meaningful employment upon release. The PIE Program has two primary objectives: To generate products and services that enable prisoners to make a contribution to society, help offset the cost of their incarceration, compensate crime victims, and provide inmate family support. To provide a means of reducing prison idleness, increasing inmate job skills, and improving the prospects for successful inmate transition to the community upon release. To serve its clients, the Company has established U.S. Technologies Inc. as the parent organization to provide management and financial resources to its wholly owned operating subsidiaries. The operating subsidiaries are Labor-to-Industry Inc. ("LTI"), which operates the Company's manufacturing outsourcing operations, and Service-to-Industry Inc. ("STI"), formed in March 1998, which will operate the Company's service outsourcing operations. Each subsidiary negotiates an agreement with a prison under which facilities and participants are available to the Company. Overview The Company reported significant losses during the last several years for a variety of reasons. During 1995, the Company attempted, with little success, to rebuild its customer base, most of which had been lost in 1994 due to poor production and quality at the Company's PIE operation at LTI. In response to this, the Company began a search to find and acquire products or technologies which could be produced with the Company's PIE labor force. Unfortunately, the plan to acquire companies and products did not succeed and the Company did not begin to take steps to control costs or reduce the size of its work force. In 1996, these same problems persisted while staffing and expenses continued unabated. In January 1997, as part of the transaction through which control of the Company passed to the new management team, the Company began to receive a significant infusion of equity capital which ultimately totaled approximately $536,000. This capital infusion was used to finance the significant expansion of the Company's operations. The new management team took immediate steps to cut costs and improve production management, product quality and customer service. All these steps resulted in an immediate increase in revenues with existing customers and opportunities to serve new customers. These steps also 8 9 Overview (continued) resulted in the recognition of a restructuring charge to recognize the cost of severance and lay-off of excess personnel of approximately $197,000. The new management team also made a thorough evaluation of the value of the assets acquired by prior management and took appropriate steps to write off the value of assets which would not be realized, totaling approximately $1,409,000, and obsolete inventory, in the amount of approximately $307,000. The new management team also acted to resolve most of the outstanding litigation, inherited from prior management, recognizing a charge of approximately $252,000. Results of Operations The following analysis compares the results of operations for the three month and six month periods ended June 30, 1998 to the comparable periods ended June 30, 1997. Net sales during the three months ended June 30, 1998 were $ 1,154,147, compared to $ 1,062,013 during the three months ended June 30, 1997. The increase in net sales in the amount of $ 92,134, representing 9%, was the result of improvements instituted by the Company's new management which included; converting all sales employees to commission-only sales agents, improved bidding techniques, improved product quality and faster service. Net sales during the six months ended June 30, 1998 were $ 2,664,711, compared to $1,733,800 during the six months ended June 30, 1997. The increase in net sales in the amount of $ 930,911, representing 54%, was the result of improvements instituted by the Company's new management which included; converting all sales employees to commission-only sales agents, improved bidding techniques, improved product quality and faster service The Company's new management took steps during the three months ended March 31, 1997 to evaluate the carrying value of assets, assess the Company's staffing levels, and resolve outstanding litigation. The Company's actions as a result of this process resulted in the following charges recognized as of the beginning of the second quarter of 1997: Effective on April 1, 1997, the Company recognized a $1,408,839 non-cash charge for the impairment of long lived assets to write-off all remaining assets described as investments in technologies and goodwill. These included the remaining unamortized cost of acquired technologies and goodwill of acquired companies. The assets and technologies, which had been inactive during 1997 and 1996, were thoroughly evaluated by the Company's new management and found to have no value. During the first quarter of 1997, amortization of these assets totaled $111,078. Effective on April 1, 1997, the Company recognized a charge to restructure the Company's operations in the amount of $196,903, representing the costs of severance to terminate thirteen management, sales and administrative positions and lay-off 50 inmates at LTI. The Company also recognized a charge in the amount of $252,256, representing an accrual for losses from a variety of lawsuits with third parties and the Company's former management. Finally, on April 1, 1997, the Company recognized a non-cash charge to adjust its reserve for obsolescence to write-off all remaining obsolete inventory in the amount of $306,888. In the three months ended June 30, 1998, cost of goods sold was $ 793,516 which represented 69% of net sales. During the three months ended June 30, 1997, cost of goods sold was $ 1,109,053 which represented 104% of net sales. The cost of goods sold for the three months ended June 30, 1997 includes the previously mentioned inventory obsolescence write-off in the amount of $306,888, or 29% of net sales. The remaining improvement in the Company's cost of goods sold is a direct result of changes instituted by 9 10 Results of Operations (continued) the Company's new management, including, improved production management, improved purchasing procedures, improved bidding procedures and improved quality. In the six months ended June 30, 1998, cost of goods sold was $ 1,791,106, which represented 67% of net sales. During the six months ended June 30, 1997, cost of goods sold was $ 1,670,946 which represented 96% of net sales. The cost of goods sold for the six months ended June 30, 1997 includes the previously mentioned inventory obsolescence write-off in the amount of $306,888, or 18% of net sales The remaining improvement in the Company's cost of goods sold is a direct result of changes instituted by the Company's new management, including improved production management, improved purchasing procedures, improved bidding procedures and improved quality. Selling expenses during the three months ended June 30, 1998 were $ 29,271, representing 3% of net sales. During the three months ended June 30, 1997, selling expenses in the amount of $21,064 represented 2.0% of net sales. These expenses increased primarily due to the increase in sales revenue combined with the conversion of the Company's full-time sales employees into independent sales agents, compensated on a commission only basis. Selling expenses during the six months ended June 30, 1998 were $ 66,402, representing 3% of net sales. During the six months ended June 30, 1997, selling expenses in the amount of $21,064 represented 1% of net sales. These expenses increased primarily due to the increase in sales revenue combined with the conversion of the Company's full time sales employees into independent sales agents, compensated on a commission only basis. General and administrative expenses during the three months ended June 30, 1998 were $463,909, which represented 40% of net sales. During the three months ended June 30, 1997, general and administrative expenses were $ 311,823 which represented 29% of net sales. The increase in general and administrative expenses is the result of the formation of the Company's management team who is actively working to develop all areas of the Company's business. General and administrative expenses during the six months ended June 30, 1998 were $850,661, which represented 32% of net sales. During the six months ended June 30, 1997, general and administrative expenses were $ 517,448, which represented 30% of net sales. The increase in general and administrative expenses is the result of the formation of the Company's management team who is actively working to develop all areas of the Company's business. During the three months ended June 30, 1998, the Company had a net loss of $ (38,802) or $ (0.00) per weighted-average share. During the three months ended June 30, 1997 the company reported a net loss of $ (2,021,613) or $(0.08) per weighted-average share. During the six months ended June 30, 1998 the Company had net income of $ 73,109 or $0.00 per weighted-average share. During the six months ended June 30, 1997, the Company reported a net loss of $ (2,264,672) or $(0.10) per weighted-average share. The Company did not recognize a current tax provision for the six months ended June 30, 1998, as a result of the utilization of a portion of its net operating loss carryforward. The Company also did not recognize a deferred tax provision, for the use of its net deferred tax asset for the other periods presented, due to a corresponding reduction in the related valuation allowance. The 100% valuation allowance against the Company's approximately $3,720,000 net deferred tax asset continues to be recognized at June 30, 1998. As a result of the series of transactions through which the Company's new management gained control in 1997, the Company is limited in the utilization of prior accumulated net operating losses and anticipates that 10 11 Results of Operations (continued) approximately $600,000 per year of net operating losses are available to offset future annual taxable income. The Company expects to pay taxes in 1998 in accordance with the provisions of the alternative minimum tax and various state income tax laws as the Company's operations are anticipated to expand. Liquidity and Capital Resources During the six months ended June 30, 1998 and 1997, the Company experienced negative operating cash flows of $ 98,254 and $ 441,858 respectively. Negative operating cash flows in the six months ended June 30, 1998 resulted from increases in accounts receivable of $ 130,038, and inventory of $169,409, attributable to increased sales volume. Negative operating cash flows in the six months ended June 30, 1997 resulted principally from the operating loss incurred during that period, which was largely offset by depreciation and amortization, impairment of long lived assets and loss on inventory write-down in the amount of $ 1,857,671. The primary uses of cash during the six months ended June 30, 1997 was the reduction of accounts payable and the increase in accounts receivable attributable to increased sales volume over preceding quarters. Cash provided by financing activities of $ 205,390 and $ 553,111 during the six months ended June 30, 1998 and 1997, respectively, was primarily due to the receipt of net proceeds from the issuance of common stock. On January 12, 1998, the Company issued 4% convertible subordinated debentures and 275,000 common stock purchase warrants exercisable at $1.00 per share, through a private placement to certain foreign investors pursuant to a claim of exemption under Regulation "S" promulgated by the Securities and Exchange Commission under the Securities Act of 1933. The net proceeds to the Company, after legal and other costs, was $224,277, which was used to liquidate certain 1996 liabilities at a substantial discount and provide working capital to support the Company's operations. On February 25, 1998 and March 5, 1998, the holders of the debentures converted the amounts outstanding into 563,215 shares of the Company's common stock. All of the warrants remain outstanding. During the six months ended June 30, 1997, as a result of the acquisition of the Company by the investor group led by Mr. Smith, $289,500 was contributed to working capital. This contribution significantly improved the Company's financial condition thus strengthening the Company's relationships with vendors and allowing the Company to finance significant increases in sales volume. The Company has been able to increase its sales volume in the first six months of 1998 by approximately 54%, and substantial progress was made by improving all aspects of operating costs. As a result of these efforts and the equity infusion described above, net working capital improved by $220,584 from a negative $849,592 as of December 31, 1997, to a negative $629,008 as of June 30, 1998. Accounts receivable increased by $ 130,038 to $ 471,365, representing approximately 32 days' sales, at June 30, 1998, from $341,327, representing approximately 30 days' sales as of December 31, 1997. Inventory increased by $ 169,409 to $ 244,342 at June 30, 1998 from $ 74,933 at December 31, 1997, primarily as a result of increases in raw materials inventory. Prepaid expenses increased by $ 118,455 to $ 122,699 as of June 30, 1998 as a result of prepayment of insurance premiums and a deposit related to the Company's pending start-up of customer call center operations. Accounts payable due to manufacturing increased by $23,205 to $ 591,046, representing approximately 60 days' cost of sales, at June 30, 1998, from $ 567,841, representing approximately 66 days' cost of sales, at December 31, 1997, excluding the charge to the Company's inventory valuation allowance, described above. Many of the improvements described above were the result of new management's efforts to improve relations with its customers and suppliers. In an effort to improve cash flow from operations, during 1997, management also reached an agreement with its largest customer by which this customer pays for products produced by the Company on the 15th and 30th of each month. The Company has also negotiated favorable terms for payment with several key suppliers and one former supplier. 11 12 Liquidity and Capital Resources (continued) The Company's growth plans include the entry into non-garment cut-and-sew operations and a customer call center. During the quarter ended June 30, 1998, the Company opened its first cut-and-sew operation at a Wackenhut Corrections Corporation (WCC) correctional facility in McFarland, California (McFarland). The Company is currently involved in substantial discussions with several states in which the Company has been invited to develop secure call center operations in women's correctional facilities. During the quarter ended June 30, 1998, the Company was completing the installation of a call center operation at a state correctional facility in Draper, Utah (Draper), which began performing call center services in July 1998. The Company has also entered into substantial discussions with a furniture manufacturer who plans to repatriate a furniture assembly operation currently performed outside the United States. Most of these expansions will not require significant up-front capital investments. At McFarland, the Company's investment through June 30, 1998 was approximately $ 33,000. This operation is the first to take advantage of WCC's effort to identify products which it currently buys from outside suppliers, which will now be made by inmates at a WCC facility in which the Company is operating a PIE business. The investment through June 30, 1998 at Draper was approximately $ 41,000. Management believes that the cash flow generated from operations is adequate to enable the Company to continue to expand its Lockhart, Texas operations and expand into the remaining five new facilities planned for 1998. The Company's total debt as of June 30, 1998 was $ 35,934. Management believes that, if it chose to do so, approximately $500,000 of additional financing could be provided through borrowings secured by the Company's assets. These assets include accounts receivable from Fortune 1000 companies, inventory and fixed assets, all of which are currently unencumbered. The Company's 1998 plans call for expansion into new prison facilities. The timetable for the expansion could be accelerated with the infusion of additional capital. In January 1998, the Company obtained, before costs and expenses, $275,000 of new capital. The initial terms of the new funding could have allowed the Company to access up to $1,000,000 of capital, however, management determined that its cash needs did not warrant the cost of capital of the additional funding. In July, 1998, the Company received $3,350,000, pursuant to an investment agreement with USV Partners, LLC, a Delaware limited liability company, under the terms of which the Company will sell to USV Partners, LLC, 500,000 shares of its 9% Series A Convertible Preferred Stock, payable in cash or in shares of the Company's common or convertible preferred stock, and 500,000 common stock warrants (exercisable at $1.00 per share) for a total net sales price to be received by the Company of $5,000,000, plus $500,000 upon the exercise of the warrants. Under the terms of the Series A Convertible Preferred Stock and warrants, the purchaser may convert the preferred shares and warrants to common stock of the Company on and after January 12, 1999. Pursuant to the terms of the investment agreement and the Certificate of Designations filed by the Company with the Delaware Secretary of State, the conversion price for the preferred shares will be equal to the average of the daily closing price for the common stock for the 15 trading days preceding December 31, 1998, provided that (i) if the average daily closing price is less than $0.70 per share of common stock, the conversion price shall be $0.70 per share and (ii) if the average closing price is more than $1.00 per share of common stock, the conversion price shall be $1.00 per share. However, if the Company's pre-tax earnings per share for the 12-month period ending December 31, 1998 are less than a certain per-share earnings target, then, notwithstanding the preceding sentence, the conversion price shall be $0.65 per share of common stock. If the Company fails to obtain this per-share earnings target, the conversion of the convertible preferred stock, at $.65 per share, will result in the issuance of an additional 7,692,308 shares of common stock, plus 500,000 shares of common stock upon the exercise of the warrants, diluting the Company's per-share earnings thereby. The closing of the sale of the Series A Convertible Preferred Stock and warrants is anticipated to occur by the end of August, 1998. Inflation Inflation has not had a material impact on the Company's operations. New Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 128, " Earnings per Share," is effective for fiscal years ending after December 15, 1997. This statement established standards for computing and presenting earnings per share. The provisions of this pronouncement have been reflected in the accompanying financial statements. SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997, establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial 12 13 New Accounting Pronouncements (continued) statement that is displayed with the same prominence as other financial statements. The provisions of this pronouncement have been reflected in the accompanying financial statements. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997, establishes standards for reporting information about operating segments in annual financial statements and interim financial reports issued to shareholders. Generally certain financial information is required to be reported on the basis that it is used internally for evaluating performance of and allocation of resources to operating segments. The Company has not yet determined to what extent the standard will impact its current practice of reporting operating segment information. Year 2000 The Company is currently evaluating its computer systems to determine whether modifications and expenditures will be necessary to make its systems and those of its vendors compliant with year 2000 requirements. These requirements have arisen due to the widespread use of computer programs that rely on two-digit date codes to perform computations or decision-making functions. Many of these programs may fail as a result of their inability to properly interpret date codes beginning January 1, 2000. For example, such programs may interpret "00" as the year 1900 rather than 2000. In addition, some equipment, being controlled by microprocessor chips, may not deal appropriately with the year "00". The Company believes it will timely meet its year 2000 compliance requirements and does not anticipate that the cost of compliance will have a material adverse effect on its business, financial condition or results of operations. However, there can be no assurance that all necessary modifications will be identified and corrected or that unforeseen difficulties or costs will not arise. In addition, there can be no assurance that the systems of other companies on which the Company's systems rely will be modified on a timely basis, or that the failure by another company to properly modify its systems will not negatively impact the Company's systems or operations. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 Certain statements in this quarterly report on form 10-Q contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which statements can generally be identified by use of forward-looking terminology, such as "may," "will," "expect," "estimate," "anticipate," "believe," "target," "plan," "project," or "continue" or the negatives thereof or other variations thereon or similar terminology, and are made on the basis of management's plans and current analyses of the Company, its business and the industry as a whole. These forward-looking statements are subject to risks and uncertainties, including, but not limited to, economic conditions, competition, interest rate sensitivity and exposure to regulatory and legislative changes. The above factors, in some cases, have affected, and in the future could affect, the Company's financial performance and could cause actual results for 1998 and beyond to differ materially from those expressed or implied in such forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. 13 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is involved in several lawsuits related to prior management and claims against companies acquired or controlled by prior management. Several of these suits claim that the Company is liable as a successor in interest for amounts owed by entities whose assets were acquired by The Company. Management is vigorously defending these lawsuits. While the outcome of these lawsuits is uncertain, should the Company not prevail, Management does not believe losses associated with these lawsuits would have a material impact on the operations of the Company. The Company is involved in several lawsuits brought by former management officials who claim they are entitled to certain severance benefits and back pay. The aggregate amount claimed under these lawsuits, including interest and attorney fees is approximately $444,000. Management is vigorously defending these lawsuits and is asserting numerous counterclaims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 1998 Annual Meeting of Stockholders of the Company was held on May 29, 1998. At the meeting the following persons were elected as directors to serve for a term of one year and until their successors are elected and qualified: Kenneth H. Smith, James C. Melton, Sr. and C. Gregory Earls. The number of votes cast for and against each nominee for director was as follows:
Votes Votes FOR AGAINST --- ------- Kenneth H. Smith 19,251,576 6,673,004 James C. Melton, Sr. 19,251,576 6,673,004 C. Gregory Earls 19,241,559 6,683,421
In addition, the shareholders of the Company ratified the appointment of BDO Seidman LLP as independent auditors for the Company and its subsidiaries for the fiscal year ended December 31, 1998. The number of votes for and against the ratification of BDO Seidman LLP was as follows:
Votes Votes Votes FOR AGAINST WITHHELD --- ------- -------- 24,888,490 9,800 7,190
No other matters were presented or voted for at the Annual Meeting. ITEM 5. OTHER INFORMATION. Proposals of shareholders intended to be presented at the Company's 1999 Annual Meeting of Stockholders must be received at the Company's principal executive offices by January 6, 1999 in order to be eligible for inclusion in the Company's proxy statement and form of proxy for that meeting. With respect to any such proposals received by the Company after March 22, 1999, the persons named in the form of proxy solicited by management will vote the proxy in accordance with their judgment of what is in the best interests of the Company. 14 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. The following exhibit is filed with this report: Exhibit No. Description 27.1 Financial Data Schedule (for SEC use only) During the quarter ended June 30, 1998, no reports on Form 8-K were issued. 15 16 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. TECHNOLOGIES INC. DATE: August 12, 1998 BY: /s/ K. H. Smith ----------------------- K. H. Smith President and CEO 16 17 Exhibit Index
Exhibit No. Description - ----------- ----------- 27.1 Financial Data Schedule (for SEC use only)
17 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30, 1998 UNAUDITED FINANCIAL STATEMENTS OF US TECHNOLOGIES, INC., AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS IN FORM 10-Q FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1998. 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 16,506 0 471,365 0 244,342 854,912 1,346,464 1,167,507 1,377,655 1,483,920 0 0 0 583,906 (706,467) 1,377,655 2,664,711 2,664,711 1,791,106 2,708,169 (118,829) 0 2,262 73,109 0 73,109 0 0 0 73,109 0.00 0.00
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